Yahoo's woes vex employees, shareholders

SAN FRANCISCO - It's not a pleasant time to be a Yahoo Inc. employee or shareholder.

Hoping to snap out of a financial malaise, Yahoo is preparing to lay off as many as 1,000 workers in the Sunnyvale-based company's biggest purge since it was scrambling to survive the dot-com bust seven years ago.

Cost-cutting like that normally makes investors happy, but Wall Street wasn't in a celebratory mood late Tuesday after Yahoo reported a 23 percent drop in its fourth-quarter profit and provided a tepid outlook for 2008.

The one-two punch pounded Yahoo's already sagging shares, hurling the stock 9.4 percent lower when trading opened Wednesday. Shares fell $1.96 to $18.85. The backlash extends a decline that has obliterated $35 billion in shareholder wealth since the end of 2005, slashing Yahoo's market value by more than 50 percent.

Unless Yahoo can bounce back soon, the company could face more pressure to find a buyer or make another dramatic move like hiring rival Google Inc. to run its search engine and generate more ad revenue.

Microsoft Corp. has been mentioned as Yahoo's most likely suitor, although more analysts are starting to question whether Yahoo's deepening funk will scare off potential bidders.

Jerry Yang, a Yahoo co-founder who became chief executive seven months ago in an attempt to shake things up, remains confident better times are ahead as the company realizes the gains from recent acquisitions and ad partnerships.

But he indicated the big payoff is unlikely to come before 2009, warning in a prepared statement that Yahoo still faces "headwinds" this year.

"This sort of transition takes time," Yang said in a conference call with analysts Tuesday. "But we have the talent and the strong cash flow it takes to succeed."

Investors, though, appear to be growing weary of waiting for a turnaround that has been promised for the past 18 months. Yahoo shares dropped $2.09 in extended trading Tuesday after finishing the regular session at $20.81, up 3 cents.

"I'm surprised by how slowly they seem to be moving," said Cantor Fitzgerald analyst Derek Brown. "Yahoo still has quite a bit of work ahead."

In its most drastic step since Yang became CEO, Yahoo is drawing up plans to whittle as many as 1,000 jobs from its payroll — a 7 percent reduction of its 14,300-employee work force.

Yahoo indicated some employees whose current jobs are eliminated may be offered new assignments in other parts of the company. Further details are supposed to be released by mid-February.

Yahoo expects to absorb a first-quarter charge of $20 million to $25 million to pay for severance costs and other expenses incurred in the layoffs.

The cost cutting could reduce Yahoo's annual expenses by more than $100 million, helping offset some lost revenue from a re-negotiated partnership with AT&T Inc. to provide high-speed Internet service.

Under a new deal announced Tuesday, Yahoo and AT&T will share revenue generated through online advertising. Previously, AT&T had paid Yahoo a portion of the fees collected from subscribers to their cobranded Internet service. Analysts had estimated that arrangement generated about $250 million in annual revenue for Yahoo.

To ease the pain of the transition, Yahoo will receive an upfront payment of $300 million to $400 million from AT&T.

Yahoo's profits have been falling even though advertisers are spending more than ever on the Internet.

The bulk of the additional online ad spending has been pouring into Internet search leader Google, which was smaller than Yahoo just three years ago and is scheduled to release its fourth-quarter results Thursday.

Yahoo earned $205.7 million, or 15 cents per share, during 2007's final three months, down from net income of $268.7 million, or 19 cents per share, at the same time in 2006.

Reflecting the gloomy aura hanging over Yahoo, analysts surveyed by Thomson Financial had projected earnings of 11 cents per share, on average.

For the full year, Yahoo's profit decreased 12 percent to $660 million.

Fourth-quarter revenue totaled $1.83 billion, an improvement of 8 percent over $1.7 billion a year earlier. After subtracting commissions paid to its advertising partners, Yahoo's revenue was $1.4 billion, in line with analyst estimates.

Yahoo estimated its revenue this year will range from $5.35 billion to $5.95 billion, excluding ad commissions. The average analyst estimate stood at $5.92 billion.

Separately, Yahoo announced it hired former VeriSign Inc. executive Aristotle "Ari" Balogh as its new chief technology officer, filling a void created with the resignation of Farzad Nazem last June. Balogh, 43, held the same job at VeriSign.

View of the day: Earnings growth in emerging markets

Earnings growth estimates for emerging markets remain too optimistic given decelerating global growth, and cost pressures, says Oussama Himani, strategist at UBS (NYSE:UBS).

He notes that while slower growth - and possible recession - has long been expected in the US, a sharp deceleration in Europe has only much more recently become an obvious development.

"Emerging markets, on the whole, are more exposed to Europe than they are to the US," Mr Himani says. "The EU is the destination of a larger share of emerging market exports."

He also warns that underlying earnings growth expectations in emerging markets are based on margin expansion - which does not occur in slower growth environments.

"This is especially the case in the current cost environment. Wage pressures are evident in most emerging markets, while neither energy prices nor commodity prices are likely to moderate in any meaningful way.

"We believe that significant earnings downgrades are likely in the months ahead.

"As a baseline scenario for 2008, we now assume sales growth will be 10-12 per cent, but that net income margins will decline by one percentage point to 11 per cent. This will imply earnings growth of about 9 per cent this year. However it will take only small further changes in margins to imply no earnings growth."

Ingredient costs hit Kellogg, Kraft earnings

CHICAGO (Reuters) - Kraft Foods Inc (KFT.N) and Kellogg Co (K.N), two of the world's largest food makers, posted lower quarterly results on Wednesday, hampered by soaring costs for ingredients like dairy products and wheat.

The fourth quarter was one of the worst ever for food companies in terms of commodity costs, analysts said. Kraft said that wheat, soybean oil, cheese, coffee, cocoa and a host of other commodities are well above their 10-year averages.

"Across the food space, it's showing up this (fourth) quarter," Edward Jones analyst Matt Arnold said of rising commodity costs. Arnold said costs should remain tough in the first quarter, but then could ease later this year.

Like other food companies, Kellogg, the largest cereal maker, and Kraft, the largest North American food company, have raised prices to try to help recoup some of the rising costs.

Those increases come as the U.S. economy teeters on the brink of a recession. But executives at both companies said they should be well positioned if the economy were to move into a full-fledged recession.

"The most prominent impact of a potential recession will be that people will continue to eat at home more," rather than at restaurants, Kraft Chief Executive Irene Rosenfeld said in an interview with Reuters.

FOURTH-QUARTER RESULTS

Kraft profit fell to $585 million, or 38 cents a share, in the fourth quarter compared with $624 million, or 38 cents, a year earlier when the company had roughly 100 million more shares outstanding.

The maker of Oreo cookies, Crystal light drink mixes and Oscar Mayer lunch meat said profit was 44 cents a share excluding restructuring costs, matching the average analyst estimate compiled by Reuters Estimates.

Revenue rose to $10.40 billion from $9.37 billion. Excluding divestitures and the benefit from the weaker dollar, "organic" revenue rose 6.2 percent, the company said.

The company has been making changes in its portfolio, purchasing Groupe Danone's (DANO.PA) global cookie business in November while separately agreeing to sell its Post Cereals business to Ralcorp Holdings Inc (RAH.N).

At the same time, it has increased development of new products like Oreo sandwich cakes and Oscar Mayer deli sandwich kits to help boost sales.

Still, surging dairy costs weighed on profits. The company, which gets almost one-fifth of its revenue from cheese, said dairy costs were up more than 40 percent in the quarter.

"Cheese has been a category that they have struggled to manage properly for the past decade," Gregg Warren, analyst at Morningstar, said.

KELLOGG SLIPS

Kellogg -- manufacturer of Frosted Flakes cereal, Keebler cookies and Eggo waffles -- posted a 3 percent decline in fourth-quarter profit to $176 million, or 44 cents a share, matching analysts estimates.

Sales rose 8.1 percent to $2.79 billion. Internal sales, which exclude currency fluctuations and acquisitions, increased 5 percent.

Fourth-quarter North American internal sales rose 8 percent in the cereal business, 2 percent in the snack business and 6 percent in the frozen and specialty channels business.

For 2008, the company stood by its earnings forecast of $2.92 to $2.97 a share. Kellogg Chief Executive David Mackay said on a conference call that the company should be able to weather a recession.

"Really, our business has performed pretty well through those periods," he said of past U.S. economic slowdowns.

Kellogg shares were up 64 cents a share at $50.26 on Wednesday on the New York Stock Exchange and Kraft was down 33 cents at $29.86. Kellogg trades at 18 times estimated 2008 earnings, while Kraft trades at a multiple of 16.5 times.

Kraft Foods 4Q profit falls

CHICAGO - Kraft Foods Inc., the nation's biggest food and beverage maker, said Wednesday its fourth-quarter profit fell 6 percent due to higher dairy prices and one-time costs.

The company also said it expects earnings per share of at least $1.90 for this year, excluding restructuring costs. Analysts anticipate profit of $1.94 per share.

Net income fell to $585 million, or 38 cents per share, for the three months ending Dec. 31. That's down from $624 million, or 38 cents per share, during the same period last year.

The 2007 per-share result was based on 90 million fewer shares outstanding.

Excluding asset impairment and other costs, the company earned 44 cents per share, matching estimates of analysts polled by Thomson Financial. Those figures typically exclude one-time items.

The company primarily blamed a nearly 40 percent boost in dairy prices during the quarter for the earnings decline. The high commodities costs dragged down operating earnings at the company's North American Cheese and Foodservice division by more than 53 percent.

Revenue rose 11 percent to $10.40 billion from $9.37 billion in the fourth quarter of 2006. Analysts predicted revenue of $10.05 billion.

"We are off to an excellent start in our efforts to return Kraft to reliable growth," said Kraft Chief Executive Irene Rosenfeld.

For the full year, Kraft's profit fell 15 percent to $2.6 billion, or $1.62 per share. That's down from $3.06 billion, or $1.85 per share, in 2006. Full-year revenue climbed 8.4 percent to $37.2 billion from $34.4 billion in 2006.

The Northfield-based company also lowered estimates for how much it expects to spend on its restructuring program, saying costs would about $2.8 billion instead of its expected $3 billion.

Its shares fell 33 cents to $29.86 in morning trading Wednesday.

Lazard earnings surge on merger advisory fees

NEW YORK (Reuters) - Merger advisory firm Lazard Ltd (LAZ.N) on Wednesday said its fourth-quarter earnings rose 43 percent, beating estimates, on increased merger advisory fees.

The company also renewed Chief Executive Bruce Wasserstein's contract for five years, and boosted its quarterly dividend.

Lazard focuses on generating merger advisory, restructuring, and asset management fees and does little trading of its own funds. That business mix has insulated the company from the massive writedowns that many other Wall Street firms faced in recent quarters.

But the credit crisis is slowing merger activity globally, which over time could show up in Lazard's results. Lazard earns fees when deals are closed, and, in general, fewer new mergers are being announced, and fewer announced transactions are closing.

Just over $180 billion of merger transactions have closed in 2008 so far worldwide, down from over $265 billion in the same period last year, according to Dealogic.

The timing for deal closings could be less predictable in the near term, said Vice Chairman Steven Golub in an interview.

"The short-term timing could be erratic, but we still see a lot of opportunities," Golub said, adding that restructuring activity is showing signs of picking up.

Net income was $122.6 million, or $1.04 a share, from $85.8 million, or 78 cents, a year earlier. Lazard's operating revenue in the fourth quarter rose 26 percent to $618 million.

Analysts on average expected Lazard to earn 95 cents a share on $595 million in revenue, according to Reuters Estimates.

Lazard, a former partnership that went public in 2005, reports results assuming the full exchange of equity interests.

FIVE MORE YEARS

Lazard's merger advisory operating revenue soared 27 percent to $313.6 million in the fourth quarter, while restructuring revenue rose 58 percent to $32.3 million.

Asset management generated operating revenue of $231.2 million, up 32 percent. That business has staged a big turnaround in recent quarters, helped by client inflows.

Lazard has renewed the contract of Bruce Wasserstein, chairman and chief executive, through the end of 2012. Wasserstein will receive a lower base salary under the contract--$900,000 a year, compared with the prior base of $4.8 million.

But Wasserstein, who helped break down territorial walls at the century-and-a-half old Lazard prior to its initial public offering, will also receive 2.7 million restricted shares. Those shares vest at the end of the contract period, and are worth about $95 million at current prices.

The company boosted its quarterly dividend to 10 cents per share from 9 cents a share.

Shares of Lazard have fallen 31 percent over the past year, part of a broader sell-off among investment bank shares in a year of turmoil in credit and mortgage markets.

Kellogg profit falls on wheat, advertising costs

CHICAGO (Reuters) - Kellogg Co (K.N) on Wednesday posted lower quarterly profit, hit by rising costs for wheat and other commodities and increased spending on advertising.

The world's largest breakfast cereal maker said profit fell to $176 million, or 44 cents a share, in the fourth quarter, down from $182 million, or 45 cents a share, a year earlier.

Earnings matched the average analyst estimate compiled by Reuters Estimates.

Like many food companies, the maker of Frosted Flakes cereal, Eggo waffles and Keebler cookies has been hit by soaring prices for ingredients and energy. The company has increased prices and looked for ways to cut costs to try to offset higher commodity costs.

The company said fourth-quarter results included a double-digit increase in advertising investment and significantly higher costs for commodities, energy and benefits as well as up-front investment charges of 3 cents a share, down from 8 cents a share in the year-ago period.

Sales rose 8.1 percent to $2.79 billion. Internal sales, which exclude currency fluctuations and acquisitions, increased 5 percent.

Fourth-quarter North American internal sales rose 8 percent in the cereal business, 2 percent in the snack business and 6 percent in the frozen and specialty channels business.

Kellogg's international business saw internal sales rise 6 percent, driven by a 6 percent gain in Latin America, a 4 percent gain in Europe and a 2 percent gain in the Asia Pacific region.

Strong performance in Japan, South Korea, India and South Africa offset continued weakness in Australia.

For 2008, the company stood by its earnings forecast of $2.92 to $2.97 a share. Analysts on average forecast $3.01 a share, according to Reuters Estimates.

Kellogg shares closed at $49.62 on Tuesday on the New York Stock Exchange. The stock is down 1 percent in the past year, compared with a 7 percent decline for the Standard & Poor's packaged foods index (.15GSPFOOD).

Kellogg 4Q earnings slip on costs

GRAND RAPIDS, Mich. - Cereal and snack maker Kellogg Co. said Wednesday its fourth-quarter profit dipped slightly due in part to higher energy and materials costs and more investment in advertising, but still matched Wall Street's expectations.

For the quarter ended Dec. 29, the Battle Creek-based company earned $176 million, or 44 cents per share, compared with $182 million, or 45 cents per share, a year ago.

Revenue rose 8 percent to $2.79 billion from $2.58 billion, benefiting partly from stronger net sales by the Kellogg International division.

The results matched estimates by analysts polled by Thomson Financial, who forecast a profit of 44 cents per share on $2.74 billion in revenue. The analysts' earnings estimates typically exclude one-time items.

The company also affirmed its full-year 2008 adjusted earnings guidance in the range of $2.92 to $2.97 per share.

Kraft profit falls on dairy costs

CHICAGO (Reuters) - Kraft Foods Inc (KFT.N) on Wednesday posted a lower quarterly profit as higher costs for dairy products and other ingredients offset an 11 percent sales increase.

The sales increase was a sign Kraft is having some success with new products and improved marketing. But the company still continues to battle higher costs for ingredients and energy.

The maker of foods ranging from Oreo cookies to Crystal Light drink mix said profit was $585 million, or 38 cents a share, in the fourth quarter compared with $624 million, or 38 cents a share, a year earlier when the company had roughly 100 million more shares outstanding.

Earnings were 44 cents a share excluding restructuring costs, matching the average analyst estimate compiled by Reuters Estimates.

Revenue rose to $10.40 billion from $9.37 billion. Excluding divestitures and the benefit from the weaker dollar, "organic" revenue rose 6.2 percent, the company said.

The company has been making changes in its portfolio, purchasing Groupe Danone's (DANO.PA) global cookie business in November while separately agreeing to sell its Post Cereals business to Ralcorp Holdings Inc (RAH.N).

Kraft has spent $2.1 billion since 2004 on a major restructuring program.

Kraft forecast 2008 earnings of at least $1.90 cents a share excluding restructuring items. Analysts on average forecast $1.95 a share, according to Reuters Estimates. It also forecast an increase of at least 4 percent in organic revenue, up from its previous forecast of 3 percent to 4 percent.

Kraft shares closed at $30.19 on Tuesday on the New York Stock Exchange. The stock is down 13 percent in the past year, compared with a 7 percent decline for the Standard & Poor's packaged foods index (.15GSPFOOD).

Reinsurer Munich Re's 2007 profit rises

FRANKFURT, Germany - Reinsurer Munich Re AG said Wednesday it expects to post a bigger profit in 2007 than last year, beating its previous target of more than $5.17 billion.

The Munich-based company, the world's No. 2 reinsurer behind Swiss Re, is scheduled to release its complete fourth-quarter and 2007 results on Feb. 25. It said its 2007 profit is expected to reach 3.9 billion euros ($5.76 billion), compared with a profit of 3.5 billion euros in 2006. The 2007 figure is also higher than the previously forecast range of 3.5 billion euros to 3.8 billion euros ($5.2 billion to $5.6 billion), the company said.

Reinsurance companies sell backup coverage to other insurers, spreading risk so the system can handle losses from major disasters. Munich Re was overtaken as the largest in the industry last year when Swiss Re completed its takeover of General Electric Inc.'s reinsurance operations.

Munich Re also allayed investors' fears that the subprime mortgage crisis could affect its results and said it expected less than 10 million euros ($14.77 million) in fourth-quarter write-downs, bringing its total exposure to such mortgage loans to 340 million euros ($502.3 million), or less than 0.2 percent of its total investment portfolio.

"Our prudent investment policy and healthy skepticism toward excesses in individual markets have proved justified," said Chief Executive Joerg Schneider in a statement. "We have a well-balanced investment portfolio. Our restraint with regard to credit risks in recent years, because risk spreads were completely inadequate, is now paying off for us."

The company also said it will propose a shareholder dividend of 5.50 euros ($8.13) a share, up from the 4.50 euros ($6.65) per share dividend it paid out in 20906.

Munich Re operates Ergo, one of Germany's biggest insurers, and Munich Reinsurance America Inc.

Canon 4Q profit edges up 1.8 percent

TOKYO - Canon Inc. said Wednesday its profit edged up 1.8 percent in the fourth quarter from the year before, helping it reach a record annual profit for the eighth straight year.

The company also forecast steady profit growth in the year ahead despite anxiety about a global economic slowdown and the strong yen, which could drag on exports.

Net income rose to 127.8 billion yen ($1.197 billion) in the October-December quarter from 125.6 billion yen a year earlier, the Japanese electronics maker said in a release. Sales of office equipment and cameras largely offset a rise in research and development expenses.

Sales in the fiscal fourth quarter climbed 3.9 percent to 1.264 trillion yen ($11.8 billion), it said.

Office equipment sales rose 5 percent on growth in its combination printer-copier-fax machine business. Single-purpose monochrome and color laser printers also helped support growth.

Sales of digital compact and single lens reflex cameras fueled 5.4 percent growth in the company's digital camera business from the year before, it said. But greater research and development spending and a rise in operating expenses held fourth quarter profits down.

For the full year, Canon's profit rose 7.3 percent to 488.33 billion yen ($4.57 billion). That missed the company's forecast for 500 billion yen but it was still the eighth straight year of record annual earnings.

Annual sales rose 7.7 percent to 4.48 trillion yen ($41.97 billion).

Looking ahead, Canon predicts that annual net earnings will rise 6.5 percent to 520 billion yen ($4.87 billion) on sales of 4.72 trillion yen ($44.22 billion).

That's an upbeat outlook amid concerns that the U.S. might be sliding into a recession and global growth could slow this year.

Sales of digital cameras remained strong over 2007, helping the Tokyo-based manufacturer soak up the impact of the strengthening yen on its exports.

Canon shares fell 1.88 percent to 4,690 yen ($43.93) on the Tokyo Stock Exchange. The company released results after the close of trade. The results were based on U.S. accounting standards.

Bernanke Fed revs up effort to head off recession

WASHINGTON (AFP) - The US Federal Reserve has stepped up its campaign to head off recession with another half-point rate cut as part of an aggressive move to avert a downward economic spiral, analysts say.

The cut Wednesday in the federal funds rate to 3.0 percent came just eight days after an emergency cut of 0.75 percentage points in the face of a global stock market rout and concerns the world's biggest economy was sinking fast.

Analysts say the Fed headed by Ben Bernanke is acting more aggressively than any time in the past two decades.

"We must go back to early 1985 to find a period when rates fell more sharply in such a short period of time," said Robert Brusca at FAO Economics.

Brusca said Fed members have an "amorphous fear of recession snowballing and getting out of hand."

Although the US has survived recessions before, Brusca said some see a more troublesome scenario.

"Having seen what happened to Japan with its property market ills, the Fed decided not to risk that a weak housing market topped by a recession added to a weakened financial sector that could turn into an economic disaster," Brusca said.

The cuts in the federal funds rate, used for overnight interbank loans, can help lower a wide range of borrowing costs for consumers and businesses, and as such can help spur activity in an economy buffeted by the worst housing slump in decades which has spilled over to the financial sector.

"The FOMC has clearly stated that the economy is job one," said Joel Naroff at Naroff Economic Advisors.

"The members recognize that the threats to the financial markets and therefore economic growth remain and that they had to get the Fed into accommodation mode. They have done so in a very dramatic fashion and have made the financial markets very happy."

As the Fed members met, the Commerce Department reported US economic growth slowed sharply to a 0.6 percent annual pace in the fourth quarter of 2007. Other data however have been mixed.

Robert MacIntosh, chief economist at Eaton Vance Management, said the Fed is scrambling to catch up to a rapidly deteriorating economic backdrop.

"The fact that this came just eight days after the last cut speaks volumes about how far behind the curve the Fed thinks they are," MacIntosh said.

"And I think the language indicates they're going to cut further."

MacIntosh said he believes the Fed may cut rates as low as 2.0 percent to help avert a recession, but not go as far as the 1.0 percent funds rate that some say precipitated the housing bubble.

"I think they're trying to keep us out of a recession," he said. "Whether this is enough or soon enough or too late remains to be seen."

Brian Bethune at Global Insight said the Fed wants to guard against negative sentiment taking hold as Congress debates an economic stimulus package aimed at boosting consumer and business spending.

"The Fed needs to throw out a life raft to the economy pending the fiscal stimulus measures that are expected to move through Congress in the next week or so," Bethune said.

"The earliest that consumers can expect to get relief from the package is June."

Some analysts say the Fed will be reluctant to cut further for fear of reigniting inflation but may be forced into more cuts if the economy deteriorates further.

The latest cut "can be seen as a second installment in the rapid and significant adjustment in the degree of monetary accommodation that began last Tuesday," said Peter Kretzmer, senior economist at Bank of America.

"We believe that the size of the easing was likely 'one-time' in nature, and expect the FOMC to be more judicious in the months ahead. At this time, we believe modest additional easing likely will take place, depending on the evolution of the economic releases."

Brusca said the Fed may have to move quickly to lift rates if the economy steadies.

"Ironically, the more successful the Fed is in stabilizing the economy the more of an inflation problem it will have and the sooner it will have it," he said.

Rate cuts consign gradualism to history

Is the era of gradualism at the Federal Reserve over? After 125 basis points of interest rate cuts in the space of eight days some economists are asking whether the US central bank is taking a new approach to monetary policy.

They see the new approach as one that emphasises getting rates down quickly to whatever level looks appropriate in the light of new information, rather than moving in a series of incremental steps.

If these economists are right, the change would have far-reaching consequences for the US economy and financial markets.

For decades the Fed has operated on an incremental basis both in good times and bad. Alan Greenspan, the former Fed chairman, was dubbed "quarter point Al" by traders for his habit of moving in 25 basis point increments.

In his 18 years as the central bank chief Mr Greenspan never cut rates by more than 50 basis points in a single meeting. Ben Bernanke, Mr Greenspan's successor, cut by 75 basis points last week and has followed it up with a further 50 basis point cut this week.

"Greenspan has left the building," says Michael Feroli, an economist at JPMorgan Chase. "What now distinguishes Bernanke is his abandonment of Fed gradualism."

There is a more prosaic explanation for the change: that the Fed simply realised it had fallen behind the curve and reasserted another Greenspan era principle - the "risk management" approach to policy that buys insurance against worst case outcomes.

This is almost certainly the way that longtime Fed officials such as vice-chairman Don Kohn regard the latest cuts. But the academics on the committee may see other reasons for operating in a less gradual fashion that reinforce the traditional risk management logic.

"The kind of moves we have seen recently are unprecedented," says Peter Hooper, chief economist at Deutsche Bank securities. "That certainly raises the possibility of something new afoot here."

Vincent Reinhart, a fellow at the American Enterprise Institute and former chief monetary economist at the Fed, says: "They have moved away from gradualism." He says Fed gradualism was hard to square with cutting edge academic research on optimal control theory. "In these models you front-load policy changes."

One justification for moving incrementally is that it encourages investors to extrapolate a series of moves in the same direction, allowing policymakers to influence long term rates.

However, theory suggests front-loaded rate changes could have an equally powerful effect but in a different way: shifting the yield curve up or down rather than tilting its slope. Such an app-roach would change the way Fed policy affects the economy, altering its relative traction on adjustable rate and fixed-rate mortgages, short and long term investments and bank profitability.

Mr Bernanke is unlikely to favour going all the way to a front-loaded policy framework. He takes seriously the Brainard principle, which advises moving incrementally when the power of a policy move is not known.

But as the Fed chairman explained in a speech in October, the Brainard principle is less compelling in circumstances where there may be heavy costs to delay.

Governor Frederic Mishkin took this argument a step further this month, when he called for a less "inertial" approach to policy in the face of financial disruptions. The result could be a fusion of traditional Fed risk management thinking with a new academic bias towards more front-loading of policy change. The result would be risk management on steroids. However, it would imply a willingness to stay on hold when expected weakness materialises and to raise rates quickly when risks abate.

Senate panel passes $157 billion stimulus plan

WASHINGTON (Reuters) - The U.S. Senate Finance Committee approved a $157 billion economic stimulus package on Wednesday that offers smaller tax rebates to more people than a plan passed by the U.S. House of Representatives.

The committee approved the bill as the full Senate prepared to begin debate as early as Thursday on competing versions of an economic stimulus plan lawmakers hope will encourage consumer and business spending to help stave off an election-year recession.

President George W. Bush wants the Senate to accept the $146 billion package passed Tuesday by the House. Senate Minority Leader Mitch McConnell of Kentucky has been pushing his fellow Republicans to reject the Senate Finance Committee bill and support the House version to avoid delays on issuing the rebate checks.

The Finance Committee bill, approved on a vote of 14-7, would provide a flat $500 tax rebate to individuals and $1,000 for couples, plus $300 per child. The rebates also would go to about 20 million low-income retirees on Social Security who would not receive checks under the $146 billion House stimulus bill.

"I've worked hard with my colleagues to improve on the House stimulus proposal and move a bill quickly," Finance Committee Chairman Max Baucus, a Montana Democrat, said. "Congress should seize with both hands this chance to make 20 million American seniors a part of our economic stimulus efforts today, and get our country growing again."

The House bill calls for rebates of up to $600 for individuals and $1,200 for married couples, plus $300 per child. The rebates would begin phasing out for individuals with more than $75,000 in taxable income and married couples with more than $150,000.

The Finance Committee bill would give a flat $500 rebate to individuals, $1,000 for couples, plus $300 per child to all tax filers reporting at least $3,000 of income, including Social Security and disability benefits.

The House bill provides for a $300 rebate for low-income workers, $600 for families who reported at least $3,000 in income in 2007 and paid no income taxes. Those families would also get the $300 child benefit.

The Finance Committee bill would also make more higher-income people eligible by doubling the income when phase-out begins to $150,000 for individuals and $300,000 for married couples.

A downturn in the housing market, a subprime mortgage crisis, tightening credit markets and rising oil prices have lawmakers and some economists worried that the U.S. economy could slip into a recession.

Economic growth slowed abruptly to 0.6 percent in the fourth quarter last year, following a surge of 4.9 percent in the third quarter, the U.S. government said on Wednesday.

The Finance Committee added a number of measures not included in the House bill, including nearly $6 billion in tax benefits for renewal energy resources. The bill would extend unemployment benefits beyond the 26 weeks offered by most states. Bush and many of his fellow Republicans oppose extending unemployment benefits.

The committee also agreed to an amendment that temporarily raises by $10 billion the amount of tax-exempt mortgage revenue bonds that states can offer to help fund low-income housing and low interest mortgages to help some homeowners facing foreclosure refinance their loans.

Like the House bill, the Finance Committee measure includes business incentives for new purchases. But it goes further by allowing companies to write off more of their losses against previous tax years.

The committee bill would cost the federal treasury about $157 billion this year and nearly $36 billion next year, but last minute additions to the bill could change that number.

Economy - Wednesday

Greenspan: Fed can't save U.S.

Ex-Fed chief Alan Greenspan doubts the central bank's ability to prevent a U.S. recession. He put the chances of a recession at 50%. He said real long-term rates have much more influence over economic activity than national decisions, while central banks have "less and less power to influence long-term rates." The Fed cut rates half a point 15 3% on Wed. after last week's emergency 75-basis-point cut.

Factory execs' optimism about the U.S. economy fell in Q4, said the PricewaterhouseCoopers Manufacturing Barometer. The poll found 29% of execs were upbeat, the lowest since the survey started in '03. Mortgage application activity rose 7.5% in the week ended Jan. 25, the Mortgage Bankers Association said. The MBA said refinancing applications soared 22.1% to the highest since July '03. But applications for buying a home retreated. British mortgage approvals for buying a home fell for a 7th month to 73,000 in Dec. from a downwardly revised 81,000 in Nov. That puts more pressure on the Bank of England to cut rates next week. Japan's output up, outlook weak

Dec. industrial output rose 1.4% vs. Nov., below views for a 2% gain. Manufacturers expect output to fall in early '08. The data suggest Japanese firms are starting to feel the pinch from slowing U.S. growth and a housing slump at home.

Russian fears of foreign investment

Two of Russia's top economic leaders made a rare public call that the Kremlin needs to adjust its hawkish foreign policy because it was affecting foreign investment. They called for Russia to pursue greater int'l cooperation. Russia will see its robust account surplus cut to zero in the next few years as imports surge and oil output stagnates, increasing Russia's dependency on foreign capital.

COMING UP THURSDAY

Employment cost index for Q4, 8:30 a.m. EST (forecast: 0.8%). Personal income and spending for Dec., 8:30 a.m. EST (forecast: income up 0.4%, spending up 0.1%, core PCE deflator up 0.2%). New jobless claims for the week ended Jan. 26, 8:30 a.m. EST (forecast: 320,000). Chicago PMI for Jan., 9:45 a.m. EST (forecast: 52).

Fed Slashes Rates As Financial 'Stress' Limits GDP To O.6%

The Federal Reserve boldly slashed interest rates on Wednesday, attempting to stave off a recession after the housing slump and tighter credit almost sank the economy in the fourth quarter.

The half-point 18eduction in the fed funds target rate, to 3%, came a week after the Fed unexpectedly cut borrowing costs by 75 basis points as stocks sold off worldwide amid U.S. recession fears.

"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the central bank said in Wednesday's post-meeting statement.

Policymakers also cited "a deepening of the housing contraction as well as some softening in labor markets."

The economy grew at an annual rate of just 0.6% in the fourth quarter, well below the robust 4.9% gain in the previous quarter and the weakest performance in five years, the Commerce Department said Wednesday. Wall Street had expected a 1.2% rise.

For all of 2007, the economy expanded 2.2% -- the slowest pace in five years.

Stocks rallied after the expected Fed rate move. But the major averages turned south on renewed concerns about bond insurers.

The 10-year Treasury yield rose 1 basis point 15 3.69%, off its intraday high but still rebounding from last week's four-year low.

The Fed said "downside risks to growth remain," suggesting it could cut rates further.

The GDP report's core PCE price index, the Fed's preferred inflation gauge, rose at a 2.7% annual rate in the fourth quarter, the biggest in more than a year.

But policymakers said they expected inflation to "moderate."

Economists applauded the Fed's move.

"It's all positive. The risk of not cutting enough is a U.S. economy that fails," said Todd Schoenberger, executive director of brokerage at USAA.

But some feared that policymakers may be too late.

"The good news is that the patient is getting the right medication, but the bad news is that the patient is sick already and won't get better for a while," said Christian Menegatti, lead analyst at RGE Monitor, an economics Web site.

It takes six months or more for rate cuts to aid the economy, analysts say.

The Fed also cut its discount rate -- the rate it charges banks for loans -- by a half-point, to 3.5%.

The discount rate is seldom used, so the central bank has been relying on its new "TAF" auctions to get cash to the banks that need it.

Dallas Fed chief Richard Fisher was the only policymaker to oppose cutting the fed funds rate. He favored no change despite signs that the economy is slowing sharply.

Home construction fell at a 23.9% annual rate -- the most since 1981 -- subtracting 1.2 percentage points from fourth-quarter GDP growth.

Companies also pared stockpiles, cutting 1.3 points from growth.

But that could be good news for future growth, economists said. Tight inventories mean factories might have to ramp up output, especially if rate cuts or a proposed economic stimulus package fuel spending.

"Stimulus, be it from the Fed or elsewhere, can be particularly potent due to the inventory drawdown," said Lakshman Achuthan, managing director of the Economic Cycle Research Institute.

Consumer spending rose at a less-than-expected 2% pace. Other data have showed retail sales falling in December.

Business investment rose 7.5%, below the third quarter's 9.3% rate but better than many forecasts.

Strong exports again helped narrow the trade deficit, adding 0.55 percentage point 15 GDP.

Separately, private-sector firms added 130,000 workers in January, much larger than December's 37,000 increase, according to ADP.

That's double Wall Street's forecast for Friday's payrolls report, which includes government jobs.

ADP has an uneven track record of forecasting the payrolls data, but it jibes with declining jobless claims.

"If employment at least is solid, it lays the groundwork for continued consumer spending," said Bruce McCain, head of investment strategy at Key Private Bank.

Economy nearly stalled in 4th quarter

WASHINGTON - The economy nearly stalled in the fourth quarter with a growth rate of just 0.6 percent, capping its worst year since 2002.

Wednesday's Commerce Department report showed that the economy deteriorated considerably during the October-to-December quarter as worsening problems in the housing market and harder-to-get credit made individuals and businesses more cautious in their spending. Fears of a recession have grown, even as inflation remained elevated.

For all of 2007, the economy grew by just 2.2 percent, the weakest performance in five years, when the country was struggling to recover from the 2001 recession. The housing collapse was the biggest culprit; builders slashed spending on housing projects by 16.9 percent on an annualized basis, the most in 25 years.

The gross domestic product report for the last quarter of 2007 came as the Democratic-run Congress and the Bush administration continued to work on a program of tax rebates and business incentives.

"We are not happy with 0.6 percent GDP growth," Commerce Secretary Carlos Gutierrez told The Associated Press. "We now need the full Congress to move forward as soon as possible because consumers — the American people — are waiting for that check and that is going to help them."

Sen. Charles Schumer, D-N.Y., said when economic growth slowed as much as it did in the final quarter "alarm bells should be going off urging Washington to give the economy a good shot in the arm."

To help bolster the economy, the Federal Reserve on Wednesday sliced a key interest rate by a bold half-percentage point, its second reduction in eight days.

Wall Street rallied but then pulled back, still wary. The Dow Jones industrials jumped more than 200 points after the Fed announcement but finished the day down 37.47.

The fourth-quarter's performance was much weaker — half the pace that economists were expecting.

"The economy has been subject to something of the perfect storm here. It has been hit by the housing slump the credit squeeze, the subprime slime and stock price declines on Wall Street," said economist Ken Mayland, president of ClearView Economics. "The economy is weathering some pretty stormy seas but it is weak."

The 0.6 percent annualized increase in gross domestic product (GDP) marked a big loss of momentum from the third quarter's brisk, 4.9 percent showing. The fourth-quarter pace was the slowest since the first quarter of last year.

The GDP figures come as worries mount that the country is on the verge of a recession or perhaps is already sliding into one.

The administration remained hopeful that a recession could be skirted.

"We are not forecasting a recession," White House spokesman Tony Fratto said. Gutierrez said: "We are looking at slower growth, and the indicators — the facts, the numbers we have at out disposal — suggest that is what we will see" for the first half of the year, the commerce secretary said. He said the economy should return to a more solid growth rate in the second half.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the country's economic health.

In the fourth quarter, consumer spending slowed to a pace of 2 percent, down from a 2.8 percent growth rate in the prior quarter. For all of last year, consumers boosted spending by 2.9 percent, the smallest increase since 2003.

Businesses also watched their spending more closely during the final quarter of last year. Fearing a lessening appetite from their customers, they cut inventories of goods. That shaved 1.25 percentage points from fourth-quarter GDP, the most in a year.

Spending by businesses on equipment and software slowed to a pace of 3.8 percent in the fourth quarter. For the year, such spending was up just 1.4 percent, the worst showing since 2002.

Sales of U.S. goods and services abroad also slowed sharply in the fourth quarter. Exports grew at a 3.9 percent pace, compared with a sizzling 19.1 percent growth rate in the third quarter. That strong export growth was a key reason why the economy performed so well as a whole in the prior quarter. For all of 2007, exports grew by 7.9 percent, the slowest in two years.

Meanwhile, inflation picked up sharply during the final quarter. However, for all of 2007, it moderated slightly.

A gauge of inflation linked to the GDP report showed that "core" prices — excluding food and energy — grew at a rate of 2.7 percent in the fourth quarter. That was up from a 2 percent rate in the prior quarter and was the biggest quarterly increase since the spring of 2006.

For all of last year, core prices went up 2.1 percent, down from 2.2 percent in 2006. The inflation figures are above the Fed's comfort zone — the upper bound of which is a 2 percent inflation rate.

The pick up prices could complicate the Fed's job of trying to energize overall economic growth while also keeping inflation under control.

Some analysts think the economy is on pace to recede from January through March. Under one rough rule, the economy would have to contract for six months in a row for the country to be considered in a recession. The odds of a recession have risen sharply over the last year, and analysts increasingly believe the U.S. will be in one during the first half of this year.

Henry Schein Sells Supplies To Docs, Dentists and Vets

Office-based practitioners, such as dentists, physicians and veterinarians, are in need of equipment that can help increase productivity, efficiency and profitability.

Manufacturing conglomerate Danaher makes a digital X-ray for dentists, and Milestone Scientific makes computer-controlled local anesthetic delivery systems.

New technology improvements, such as 3-D X-rays, electronic medical records, digitalized dental impressions and management software, are crucial to the productivity of office-based practitioners.

However, high-tech equipment doesn't just waltz into an office by itself, and that's where Henry Schein comes in.

The Melville, N.Y.-based company (NasdaqGS:HSIC - News) is the largest distributor of health care products and services to office-based practitioners in the combined North American and European markets. That includes private-practice dentists, physicians and veterinarians.

Schein's main focus is to help these private practitioners run a better business so they can provide better clinical care, says the company's chief executive, Stanley Bergman.

The company has a number of exclusive distribution relationships with firms -- such as Danaher (NYSE:DHR - News) and the world's largest oral care company, Colgate (NYSE:CL - News) -- that make dental and medical consumables as well as capital equipment, Bergman says.

Schein's system for selling supplies is a hybrid of direct mail, telesales and field sales that drive demand for the thousands of products delivered through an efficient distribution network, he says.

Schein has five distribution centers in the U.S., two in Canada and a similar number in Western Europe. Bergman says the distribution centers are expensive to establish, but once up and running, they have a relatively fixed-cost infrastructure that is highly efficient.

"The more volume you pump through that fixed-cost infrastructure, the greater the operating margins," Bergman told IBD.

Dental Group

Schein's dental group in aggregate accounts for roughly 65% of the company's total business. Its core North American dental group made up nearly 40% of total sales in the third quarter.

This segment is benefiting from improvements made throughout the dental care industry, including new technology and demographics, says analyst Jeff Johnson of Robert W. Baird.

"The dental market is currently being driven by a number of positive demographic factors, including an increasing worldwide population and the aging baby boomer generation," Johnson said.

"The (industry) is also benefiting from the longer retention of natural teeth, thus requiring increasing restorative, preventive and cosmetic care."

These factors have increased the focus on office productivity that has driven accelerating dental equipment and higher-end consumable product sales, Johnson says. And Schein has reaped the benefits.

In the third quarter, earnings swelled 50% to 66 cents a share on revenue of $1.51 billion, up 21%. Analysts polled by Thomson Financial expected 62 cents.

Schein's CFO, Steven Paladino, told IBD the company has delivered a compounded annual growth rate of 18% at the earnings level from 1995, the year it went public, through 2006.

Dental group sales rose 15%, with dental consumables up 10% and equipment and service revenue jumping 26%.

The company holds an estimated 34% share of the $6.4 billion North American dental distribution market, which is essentially in line with that of its main competitor, Patterson Cos. (NasdaqGS:PDCO - News), Johnson says.

Its medical group, driven by the same need for capital equipment that can boost productivity, saw sales grow 25% on higher influenza vaccine sales.

But the company reduced its exposure to the flu vaccine market by cutting its commitment to 15.5 million doses in 2007 and 12 million to 15 million in 2008 vs. prior estimates for 20 million doses.

"Historically, we sold flu vaccines to physicians, but we also provided products to other distributors and we wholesaled the product. We're exiting the wholesaling," Bergman said. "This helps reduce volatility while increasing visibility."

The company was able to maintain its 2007 earnings guidance of $2.53 to $2.57 a share, Paladino says. Schein also expects 2008 profit to grow to $2.93 to $3, the CFO says. Those forecasts are in line with the Street's estimates.

Bergman says its most exciting segment is its technology unit, which he expects will drive profit.

The segment saw sales increase nearly 30% in the third quarter. However, the unit accounted for just about 2% of total revenue last year. It sells software practice management systems and electronic medical records to the dental, medical and veterinary arenas.

"Technology, such as software practice management systems and electronic records, allows for increased productivity in the office and also increased cash flow," Bergman said.

In total, Schein's dental, vet and medical practice management software is used in more than 50,000 practices worldwide.

Schein's Dentrix Dental Systems and AVImark system for vets are some of the leading products in the space, the CEO says.

The electronic medical records space has a lot of opportunity, as maybe less than 5% of physicians have this software available in their office, Bergman says.

Schein built out its technology offering with the recent acquisition of Software of Excellence, a leading provider of practice management software for dentists in the U.K., Ireland, Australia and New Zealand.

Buyouts

Acquisitions have accounted for a sizeable portion of Schein's growth the last 10 years.

The company has made a dozen buyouts per year the last decade, Bergman says.

The purchases have ranged in size from firms with $20 million in sales to over $300 million in annual revenue.

More than 300 smaller distributors hold about 30% of the U.S. dental market, more than 500 smaller distributors hold roughly 50% of the U.S. medical market and more than 200 smaller distributors hold about 80% of the European dental market.

Even though the highly fragmented dental, medical and veterinary markets serve up acquisition opportunities for Schein, it still faces risks, Johnson says.

"Its growth is partially dependent on acquisitions, and should there be a lack of suitable candidates or an unfavorable economic environment, company growth could slow," Johnson said. "However, there are currently a number of potential acquisition candidates for Schein to look at."

Schein looks for two kinds of acquisitions, Bergman says.

The first is one that will increase the company's penetration in a certain market or takes it into new geographies.

The second type of acquisition will help add to Schein's product offering.

"We do our due diligence to ensure a smooth integration," Bergman said. "And we plan to continue with our (acquisition) strategy."

Bush says economy resilient despite slim GDP growth

TORRANCE, California (Reuters) - President George W. Bush said on Wednesday the U.S. economy is slowing but is resilient and would overcome problems as it has in the past, following a government report showing growth slumped at the end of last year.

U.S. gross domestic product grew at a meager annual rate of 0.6 percent in the fourth quarter of 2007, a weaker reading than the 1.2 percent rate forecast by economists.

"There are signs that our economy is slowing. There's some uncertainty in the economy. But in the long run you've got to be confident about your economy," Bush said during a visit to a helicopter factory in California.

"Our economy is flexible, it is resilient. We've been through problems before," he told employees at the Robinson Helicopter Co.

It was his first stop on a three-day Western swing to promote themes from his State of the Union address on Monday about trade, the economy, and fighting terrorism.

Bush pressed Congress to quickly approve a $146 billion economic stimulus package aimed at staving off a possible recession through tax rebates and other measures.

The House of Representatives approved the plan on Tuesday, but there is concern that it may become bogged down in the Senate over demands to include more spending for roads and other programs.

"Whatever the Senate does, they should not delay this package. They should not keep money out of your pocket," Bush said. "So my attitude is, if you're truly interested in dealing with the slowdown of the economy, the Senate ought to accept the House package, pass it, and get it to my desk as soon as possible."

Bush also pressed Congress to approve free-trade agreements with Colombia, South Korea and Panama.

"Free trade means good-paying jobs for Americans, and so Congress needs to pass these agreements for the sake of economic vitality," Bush said.

House Majority Leader Steny Hoyer, a Maryland Democrat, said it was "doubtful" the trade pacts would be approved this year.

California Gov. Arnold Schwarzenegger accompanied Bush on the tour of the factory, which exports 70 percent of its helicopters to foreign markets including Colombia.

Gas prices seen spiking again in spring

NEW YORK - Get ready for another surge in gasoline prices.

Experts are predicting pump prices, which jumped by almost a dollar a gallon in each of the last two springs in many parts of the United States, will spike again this year as refiners and gas stations switch from winter- to summer-blended fuels.

The increases, starting as early as February in southern California, could push the average national price to a record $3.50 a gallon or more by June.

That would be 17 percent higher than today's average of just under $3 a gallon, which already is about 80 cents a gallon higher than year-ago levels thanks to the surge of crude oil that took futures prices briefly to $100 a barrel. Prices in urban areas on each coast could approach $4 a gallon.

And the reason for the spring price shocks? Analysts say it's linked to a shortage of alkylate, a little-known and expensive gasoline additive that some in the industry are calling "liquid gold." It has become a must-have ingredient since refiners stopped using MTBE two years ago when the potentially cancer-causing additive was found to be seeping into ground water.

The alkylate shortage has become the most important driver of summer gas prices, said Doug Leggate, an analyst at Citigroup Global Markets. "Supply of (alkylate) will set the price of summer gasoline — not inventory levels," he said.

Oil companies deny they are purposely limiting production of alkylate, which like gasoline, jet fuel and asphalt is a byproduct of the oil refining process. But only recently have some started studying how they can boost output, and alkylate prices today are more than 15 percent higher than spot gasoline prices. That means overall costs will jump when it is added in larger quantities to summer-blend fuel.

Without additives, gasoline doesn't burn completely, increasing tailpipe air pollution. And untreated gas evaporates more quickly in hot weather, potentially causing vapor lock when it changes from a liquid to a gas and blocks fuel lines.

The federal government long ago required refiners to boost the oxygen content of summer-blend gasoline to make it burn more completely, a problem that was solved by adding MTBE and, more recently, ethanol.

But ethanol also has a high evaporation rate, so refiners increasingly have turned to alkylate, which Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service in Wall, N.J., calls the "magic bullet" in making summer gasoline.

Alkylate and other gasoline additives don't raise the same safety issues as MTBE because they don't bond with water as effectively as MTBE did, analysts say.

Demand for alkylate changes with the seasons, falling in autumn and rising in the spring. On average, alkylate makes up about 10 percent of a gallon of gas, though that rises to as much as 15 percent in summer. But making more of it is not as simple as throwing a switch since the underlying chemical properties of oil limit how much of any one refined petroleum product can be produced.

On average, about 44 percent of each barrel of oil ends up as gasoline, 22 percent as diesel fuel and heating oil, 9 percent as jet fuel, and about 4 percent each as heavy fuel oil and liquefied petroleum gas, according to the Energy Department. The remainder is comprised of smaller products and additives.

The refining process is loud, hot and smelly. Boilers separate, or "crack," oil into new substances by subjecting it to high temperatures and pressure. As different products are boiled out, pipes carry them to other boilers or vessels where they're further refined, mixed with other substances or cleaned of pollutants and toxins.

Alkylate is made via a chemical reaction sparked when olefin fluids and isobutane — two of the smaller byproducts of the main gasoline producing unit — are mixed with acid.

"As opposed to the (gasoline unit) that cracks big components into small, this one takes two components and basically combines them," said Mark Fligner, director of planning and economics at Valero Energy Corp.'s refinery in Paulsboro, N.J., across the Delaware river and just south of Philadelphia.

Owners of about two-thirds of U.S. refineries have invested the $100 million or more it takes to add an alkylate unit. The rest have to buy alkylate on the spot market if they want to use it as additive in their gasoline supplies.

Refiners aren't gaming the system, purposely limiting alkylate production to boost gas prices, said John Auers, senior vice president at Turner Mason & Co., a Dallas consultancy. "They're not because they can't," he said. "You can't make more alkylate than you have feedstocks."

But there are tradeoffs that every refiner must weigh. For example, olefins and isobutane are in high demand for use in producing other lucrative products like plastics. Refiners can tweak their main gasoline producing unit to make more olefins and isobutane, but that would cut the gasoline output.

Alkylate prices have jumped from 77 cents a gallon in the summer of 2001 — when MTBE was still in use — to nearly $3 a gallon at points over the past two summers. Wednesday's price on the spot market was $2.72 a gallon, 40 cents more than the spot price of gasoline, according to Platts. Retail prices for gas are higher because things like state and federal taxes are added. In recent summers, that spot market differential has jumped as high as 60 cents.

Refiners place the blame for spring gas price increases on crude costs, environmental regulations that have increased the overall cost of refining, and their inability to expand or build new refineries fast enough to keep up with gasoline demand.

John Pickering, vice president and general manager at the Paulsboro refinery, said Valero makes enough alkylate to meet its needs, but concedes that there is a national shortage of the additive in the spring and summer.

Other refiners contacted by The Associated Press said they are reluctant for competitive reasons to talk about how they blend gasoline, or whether they face alkylate shortages.

What is known, however, is that refiners are hiring companies such as UOP LLC of Des Plaines, Ill., to determine whether they can increase the capacity of their existing alkylation units. "In the last year or so, there has been a significant uptick (in business)," said Ashis Banerji, director for refining at UOP, which licenses alkylation technology to refiners.

And the 36 percent of domestic refineries that don't have alkylation units are looking at adding them.

"Our impression is that refineries are moving as fast as they possibly can to add alkylation capacity," said Jim Pawloski, business director at UOP competitor DuPont Clean Technologies, a unit of DuPont Co. He said his unit's business has jumped five-fold over the past five years and will likely double again this year.

The steep jump in summer alkylate prices has also caught the attention of at least two companies that used to produce MTBE. Enterprise Products Partners LP and Texas Petrochemicals Inc., both of Houston, say they're closely studying whether to convert idled MTBE plants into alkylate factories.

That also highlights the conundrum that is alkylate: If too many refiners decide to spend big bucks to crank up production, the premium prices now enjoyed by alkylate makers could disappear.

Refiners have to weigh the cost of such an investment against the incremental cost of simply buying the extra alkylate they need. "I'm not sure that it would be economical," said Jeff Hazle, technical director at the National Petrochemical and Refiners Association.

But if production doesn't rise, American motorists will be faced with big jumps in spring gas prices for years to come.

Immigrants hit hard by slowdown, subprime crisis

WASHINGTON (Reuters) - As an economic slowdown and the subprime mortgage crisis deepen across the United States, Hispanic immigrants are increasingly in danger of losing their jobs and their homes.

Both legal and illegal immigrants joined Americans in buying homes they could barely afford when the market spiraled upward and many have been caught with mortgages higher than the value of their homes as prices have slumped in the past year.

Just as subprime mortgage payments rose and house prices fell, the economy's slowdown has hurt the construction sector, which employs large numbers of Hispanics and other immigrants.

Unemployment among Hispanics in the United States jumped to 6.3 percent in December, up from 5.7 percent the previous month and well above the national average of 5 percent, U.S. Department of Labor statistics show.

And almost half of the mortgage loans in the hands of Hispanics are subprime, making them especially vulnerable to the housing downturn.

"Economic conditions are deteriorating and many immigrants now can't work those extra hours or find that second job to keep up with their mortgage payments," said Aracely Panameno at the Center for Responsive Lending (CRL) research policy group.

Nelson, a 29-year-old legal immigrant and construction worker from El Salvador, had a miserable run of luck in November, when he lost his job and his subprime mortgage bills jumped $650 to about $2,650.

He says he now has to sell the home he bought in Maryland in 2005. If he is unable to sell in the next four months, he will have to foreclose, meaning an even bigger financial loss and a damaging black mark on his credit record.

"I have to practically give it away," he said.

Like many caught up in the crisis, the father of three said he had no idea his monthly payments would soar two years into the mortgage when he closed the adjustable-rate subprime deal.

"You have to sign a lot of things when you buy a house, so I didn't read, I just signed. I think it was the anxiety, the happiness of buying my house," he said. "I feel a bit betrayed."

RECESSION FEARS

U.S. President George W. Bush and Congressional leaders are working on an economic stimulus package worth almost $150 billion to fend off a possible recession, and Bush last month unveiled a plan to slow the wave of home loan foreclosures by freezing the rates on some subprime loans.

But experts say most of the immigrants in financial trouble are either not entitled to help under the rescue plan or are not taking advantage of it.

There are around 43 million Hispanics in the United States, making them the country's largest minority, and Mexicans and Central Americans account for the vast majority of some 12 million illegal immigrants.

Tighter immigration laws and police raids have added further pressure on illegal workers and residents.

"There is less work, and more fear (of deportation)," said one Mexican illegal immigrant who lives with his family in Kansas. "Employers are relying more and more on you having a Social Security number in order."

Although there is no formal tally, Mexican consular sources say a growing number of illegal immigrants across the United States are starting to pack their bags and return home.

Illegal immigrants were able to buy U.S. homes during the boom years, either by showing evidence that they pay taxes or by simply presenting false documents.

Many of them took out high interest fixed-rate loans or subprime mortgages with a low entry rate that later rose sharply. Experts say language difficulties made them more vulnerable to being offered, and taking, bad deals.

"They were more exposed to abuse," said Alejandra Louden of the Congressional Hispanic Caucus Institute's housing department, which carried out a recent study on Latino home loan foreclosures. "Documents were in English and explained in Spanish, and some vital explanation would be missing."

Paulson expects US banking sector will recover

WASHINGTON (AFP) - Treasury Secretary Henry Paulson predicted Wednesday that banking sector and financial markets would recover from a wide-ranging credit crunch that has reverberated through world markets.

Paulson, a former chief executive of the Goldman Sachs investment bank, said US financial markets had weathered downturns in the past and subsequently returned to good health.

"I have great confidence in our markets. They have recovered from similar stressful periods in the past, and they will again," the Treasury chief said.

Paulson said the economy will continue growing, but "not as rapidly" as it had in recent years.

The Treasury secretary spoke at a real-estate forum in Washington as the Federal Reserve announced it had opted to cut its main interest rate by half-a-percentage point to 3.00 percent amid a worsening housing market slump.

Fears are mounting that the world's largest economy could be on the cusp of a recession. A government report earlier Wednesday showed that US economic growth slowed dramatically to a 0.6 percent annual crawl in the fourth quarter of 2007, after a 4.9 percent pace in the third quarter.

Paulson said the two-year-long housing downturn had affected the country's financial markets, partly as major banks have announced tens of billions of dollar in losses tied to mortgage investments.

"Since August, financial institutions have written off over 153 billion dollars of assets," Paulson said, but he said that US financial institutions had raised over 95 billion dollars in new capital in recent weeks to shore up their balance sheets.

Merrill Lynch, one of America's biggest investment banks, announced earlier this month that it had won fresh financial backing totaling 6.6 billion dollars from the Kuwait Investment Authority, the Korean Investment Corporation and other investors.

The bank, like rivals including Citigroup and Morgan Stanley, has suffered hefty losses on its mortgage holdings, particularly subprime home loans granted to people with poor credit.

While voicing confidence that the economy and financial markets would recover their footing, Paulson also called on Congress to quickly pass an economic stimulus plan endorsed by President George W. Bush.

"I am optimistic that Congress will pass a growth package quickly enough to have a real impact on our economy," Paulson added.

Congress is debating the package which includes tax rebates and business incentives and is valued around 150 billion dollars.

Boeing banks record 2007 profits, warns on 787 delays

WASHINGTON (AFP) - US aerospace giant Boeing reported Wednesday record profits in 2007 and raised its outlook for 2008, saying productivity gains would offset delays in its 787 Dreamliner program.

Full-year net profit soared 84 percent to a record 4.07 billion dollars, despite virtually flat sales in the fourth quarter.

However, the company warned that delays in its new 787 Dreamliner program would weigh on sales and cash flow in 2008.

For the full year 2007, adjusted earnings per share (EPS) were 5.28 dollars, driven in part by higher commercial aircraft deliveries, strong growth in defense earnings and productivity gains, Boeing said.

That compared with 2006 net profit of 2.2 billion dollars or 2.85 dollars per share.

Boeing said that fourth-quarter net profit rose four percent to 1.03 billion dollars from the same period in 2006, with earnings per share at 1.36 dollars. In 2006, profit was 989 million dollars, or 1.29 dollars a share.

The results exceeded analysts' consensus forecast for earnings per share of 5.22 dollars for 2007 and 1.32 dollars in the fourth quarter.

"Our 2007 results demonstrate the kind of quality financial performance we can achieve through our simultaneous focus on growth and productivity," said Jim McNerney, chairman, president and chief executive of the Chicago-based firm.

Boeing reported essentially flat revenue in the three months ended December 31. Sales rose to 17.48 billion dollars from 17.54 billion in the same period a year earlier.

The Dow component, citing earlier than expected productivity gains, lifted its outlook for fiscal 2008 to earnings of 5.70-5.85 dollars a share, from 5.55-5.75 dollars, "despite some development program challenges."

However, the company lowered its revenue outlook for 2008, to a range of 67-68 billion dollars, reflecting a previously disclosed delay in its new 787 Dreamliner program. The prior forecast was for revenue of 67.5-68.5 billion dollars.

For the same reason it also slashed the 2008 cash flow outlook to more than 2.5 billion dollars from more than three billion.

"Boeing continues to address challenges associated with assembly of the first airplanes, including start-up issues in our factory and in our extended global supply chain," it said.

The company reconfirmed the revised 787 Dreamliner timetable announced in mid-January: a first flight around the end of the second quarter, with deliveries to begin in early 2009.

Because of these delays, Boeing said, it expects to deliver between 475 and 480 commercial planes in 2008, lowering its previous estimate of 480-490 aircraft.

The company said the outlook for its defense business and in-production commercial airplane programs remains "very strong" for 2009.

In 2007, revenue of Boeing Commercial Airplanes rose 17 percent to 33.38 billion dollars, as the division delivered 441 aircraft, up from 398 in 2006.

Boeing Integrated Defense Systems booked revenue of 32.08 billion dollars, down one percent from 2006.

Boeing said its total company backlog as of December 31 stood at a record 327 billion dollars, up 31 percent year-over-year.

"The continued strength in Boeing's backlog bodes well for earnings stability in the commercial airplane business for several years," Lehman Brothers analysts wrote in a note to clients.

Investors cheered the results, pushing Boeing shares up 2.95 percent to 83.35 dollars around 1945 GMT in New York trade.

Economic growth in '07 weak but hiring holds up

WASHINGTON (Reuters) - Growth in the U.S. economy slowed abruptly in the fourth quarter as consumers curbed spending and homebuilding plunged, according to a government report on Wednesday that kept fears of recession alive.

The Commerce Department said gross domestic product, a measure of total goods and services output within U.S. borders, grew at an annual rate of 0.6 percent in the last quarter of 2007, while it expanded 2.2 percent over the whole year, the slowest pace in five years.

"No question, the GDP number tells us the economy is on the brink of recession, if not in one already," said Peter Boockvar, an equity strategist with Miller Tabak & Co. in New York.

A private sector report showing employers added three times as many jobs as expected in January lifted some of the gloom surrounding the growth figures. ADP Employer Services said U.S. private employers added 130,000 jobs in January.

That led some analysts to boost forecasts for the number of new jobs expected in January when the Labor Department issues its closely watched report on U.S. hiring this Friday.

There have been other reassuring hints recently of resilience in the economy, including robust orders for manufactured goods in December and lower weekly claims for jobless benefits.

That did not stop the U.S. Federal Reserve from cutting its benchmark federal funds rate by one-half percentage point to 3 percent, citing a deepening of the housing slump and some softening in labor markets.

U.S. stocks rallied after the cut in benchmark U.S. short-term interest rates -- the second in just over a week, and the dollar's value fell against other major currencies. Prices for U.S. government bonds with short maturity dates rose, while longer-dated bonds fell, steepening the yield curve.

MOMENTUM WANING

Some economists noted that the GDP report indicated a disconcerting rise in prices, but the Fed said it expected inflation to moderate in the coming quarters. That would give the U.S. central bank more leeway to cut rates even further.

The White House said the GDP report did not change its economic outlook and officials cited the slowdown as a reason to urgently pass a fiscal stimulus package that is waiting for Congressional approval.

"We're not happy with 0.6 percent growth," Commerce Secretary Carlos Gutierrez said in a telephone interview. "This is why we need to get that stimulus package out the door as soon as possible and get checks into the hands of consumers as soon as possible."

The U.S. House of Representatives has approved measures worth about $146 billion but the White House is squabbling with the Senate over lawmakers' calls for a more substantial boost including extended unemployment insurance benefits.

The chairman of the Joint Economic Committee, New York Democratic Sen. Charles Schumer, took up the cudgels for swift action on a bigger stimulus: "When quarterly economic growth slows to 0.6 percent, alarm bells should be going off urging Washington to give the economy a good shot in the arm."

RATE DISAPPOINTS

Analysts surveyed by Reuters had forecast that fourth-quarter GDP would grow at a 1.2 percent rate -- twice as fast as it did. Lackluster fourth-quarter performance followed a booming third quarter when GDP surged at a 4.9 percent rate.

A spiral downward in the housing sector took a heavy toll on growth in late 2007 and that drag is likely to continue.

Spending on building new homes plunged 23.9 percent in the fourth quarter, the biggest quarterly drop in 26 years, after falling 20.5 percent in the third quarter. Over the course of the full year, residential spending fell 16.9 percent, the worst annual performance since 1982.

While applications for U.S. home mortgages jumped to a four-year high last week -- normally a sign of housing-industry vigor -- it was mainly because people were refinancing existing mortgages, the Mortgage Bankers Association said on Wednesday.

The GDP report also showed prices were bubbling higher, as a gauge favored by the Fed, the index of personal consumption spending excluding food and energy items, rose at a 2.7 percent annual rate in the fourth quarter, well ahead of the third quarter's 2 percent increase and Wall Street expectations.

One factor that slowed fourth-quarter GDP was a decision by businesses to sell off inventories. The report said the shift from an inventory build-up to a draw-down cut more than a full percentage point from growth.

Consumer spending, which fuels more than two-thirds of U.S. economic growth, slowed in the fourth quarter to a 2 percent annual rate compared with 2.8 percent in the third quarter.

Growth in consumer spending for 2007 was the softest since 2003, a further indication that a weakening housing market is putting a strain on household finances and confidence.

Recrowned King

In the flurry of Treasury proposals for reform of the UK financial system, the news that Mervyn King has been reappointed for another five-year term as governor of the Bank of England is welcome. His challenge is not only to set monetary policy in unusually troubled times - risks of economic slowdown and inflation both loom large - but to reconnect the Bank with the financial markets.

Mr King has made mistakes. History may decide that he was right to take a tough line on moral hazard during the early days of the credit squeeze, but to voice such strong views in public was an error of judgment, given that he was forced to back down a few weeks later. That is far outweighed, however, by his brilliance as a monetary economist, and his part in creating one of the world's most effective policy frameworks at the Bank. He is the best man for the job.

Mr King may be the right governor, but the Bank's lack of market savvy and connections was exposed last autumn, and it urgently needs a top executive who knows bankers and understands banks. Improving the balance of senior expertise, and including those with a private sector background, should be a priority as new appointments come through.

Of course, the Bank would know all it needed if it took over the supervision of commercial banks. But the government is right to leave that function at the Financial Services Authority.

Today's big banks trade bonds and derivatives as much as they take deposits. To have those wholesale activities regulated by the FSA but deposits and lending regulated by the Bank of England would be unsatisfactory. Duplicating everything at both the Bank and the FSA would be even worse. But simple "information sharing" between the two institutions is not enough.

What Mr King must insist is that some of his staff are seconded to the FSA and work supervising individual banks. That, or an arrangement like it, is the best way to give the Bank the information it needs to maintain financial stability during a future credit squeeze.

Compared with these crucial questions, the proposals to help keep Bank of England support operations secret are a sideshow. They might make it easier to rescue small lenders in normal times. But support on the scale of that given to Northern Rock last year, when markets are stressed, cannot be hidden.

The run on Northern Rock was a fiasco unmatched in recent British financial history. But there are now welcome signs that the right lessons have been learned and that no repetition will ever be allowed.

White House plays down talk of recession

ABOARD AIR FORCE ONE (Reuters) - The White House played down talk that the United States might be headed for a recession and said a report on fourth-quarter gross domestic product released earlier on Wednesday did not change its outlook.

"I have not heard at all that we have changed our outlook, and we are not forecasting a recession," White House spokesman Tony Fratto told reporters traveling with President George W. Bush to California for the start of a tour of western states.

U.S. GDP in the fourth-quarter grew at a meager annual rate of 0.6 percent, the Commerce Department said. That reading was weaker than 1.2 percent rate forecast by private economists.

The report also said GDP increased by 2.2 percent in all of 2007, the slowest pace in five years.

Fratto also urged the U.S. Senate to move quickly to pass a $150 billion stimulus package aimed at boosting the economy.

"I think the only thing we can do is help remind them that America is expecting action and they are expecting it quickly and the only way for an economic growth package to have the desired impact is to do it quickly," he said.

Weak GDP data heighten US recession fears

The US economy grew at an unexpectedly weak pace of 0.6 per cent in the fourth quarter, the Department of Commerce said on Wednesday, heightening fears of a slide into recession in 2008.

It was the weakest showing for US gross domestic product growth since 2002, coming in well below expectations that the world's largest economy would slow but continue to grow at more than 1 per cent. In the third quarter, US GDP grew at a strong rate of 4.9 per cent.

The sharply slower growth in the US economy was mostly driven by the housing slump, where spending plunged 23.9 per cent in the fourth quarter - a steeper decline than the 20.5 per cent drop in the third quarter. Consumer spending grew at an annual rate of 2 per cent, or slower compared with the 2.8 per cent figure in the third quarter.

Inventories were drawn down at an unexpectedly fast $3.4bn annual rate, wiping 1.3 percentage points off the growth rate in the fourth quarter, but raising the possibility that companies have already made the most significant adjustments to their stockpiles.

"While slower growth is no surprise, the composition of today's report - featuring a very large decline in inventories in the quarter past - might raise prospects for a gain in real GDP in the first quarter 2008 (we expect a 0.1% decline)," said Steven Wieting of Citigroup.

Earlier on Wednesday, ADP, the payroll services group, released its monthly report on new private sector jobs, showing an increase of 130,000 jobs in January on a seasonally adjusted basis, compared with expectations of a 40,000 increase. "This level of growth is consistent with a rebound in the labour market", wrote Goldman Sachs analysts.

While employment in the construction industry fell by 13,000 jobs, and manufacturing employment was flat, employment in the service sector grew by 141,000 jobs.

Combined, the weak GDP data and the strong showing on the ADP report will increase the belief that while housing market woes continue to worsen, other parts of the US economy are holding up.

Market drops as bond insurer fears hit financials

NEW YORK (Reuters) - Stocks fell on Wednesday, led by financial shares, after a television commentator said he believed that the two biggest bond insurers will lose their top credit rating, a move that could bring more big losses to the financial sector.

The remarks by CNBC reporter Charles Gasparino came in the last hour of trading, knocking down major indexes from nearly 1.5 percent gains wracked up after an aggressive interest rate cut by the Federal Reserve.

Shares of bond insurers Ambac Financial Group Inc and MBIA Inc each finished down more than 10 percent, which contributed to financial shares ending among the day's worst performers.

"Once he (Gasparino) started talking, we got the sell-off. As soon as that went across, those shares went down immediately," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

A credit downgrade of bond insurers could hurt further harm the banking sector and stunt the global economy as financial institutions take a hit from subsequent write-downs of their assets.

CNBC later posted a story on its Web site saying "it had learned" of possible bond insurer downgrades by Wall Street ratings agencies, without citing any source.

The Dow Jones industrial average dropped 37.47 points, or 0.30 percent, to 12,442.83. The Standard & Poor's 500 Index finished down 6.49 points, or 0.48 percent, at 1,355.81. The Nasdaq Composite Index declined 9.06 points, or 0.38 percent, at 2,349.00.

Shares of Ambac declined 17.01 percent to $10.73 on the New York Stock Exchange. Shares of MBIA fell 12.6 percent to $13.96.

FGIC Corp's bond insurance arm lost its top "AAA" rating from Fitch Ratings on Wednesday, adding to worries about the bond insurance sector. The downgrade is a blow to the insurer's business model and could also cause downgrades to more than 100,000 municipal bonds.

FGIC is owned by a group including mortgage insurer PMI Group Inc, whose stock slid 3.4 percent to $9.11 on the NYSE, and private equity firm Blackstone Group, whose stock dropped 1.8 percent to $18.65.

Shares of insurer American International Group declined 4.2 percent to $54.37, while those of Wachovia Corp slipped 2.8 percent to $36.84.

Private sector added 130,000 jobs in Jan: report

NEW YORK (Reuters) - U.S. private employers added 130,000 jobs in January, about three times the number that economists had been expecting, a report by a private employment service said on Wednesday.

ADP Employer Services, whose employment report was jointly developed with Macroeconomic Advisers LLC, also revised the number of jobs created in December down to 37,000 from the 40,000 initially reported.

The median of estimates from 23 economists surveyed by Reuters was for the ADP report to show 45,000 new private-sector jobs in January.

U.S. Treasury debt prices fell and stock futures pared losses after the release of the data.

The higher-than-expected ADP numbers could push analysts to upwardly revise their expectations for the U.S. government's report on January non-farm payrolls, to be released on Friday.

The median of forecasts from economists polled by Reuters is for non-farm payrolls to increase by 63,000 from a surprisingly weak rise of 18,000 in December.

"Wow, 130,000 on ADP, three times the expectation," said Andrew Brenner, market analyst at MF Global in New York. "Still think 50,000 (for payrolls)? -- I don't think so."

Mortgage applications near 4-year high

NEW YORK (Reuters) - Applications for home mortgages jumped to their highest level in nearly four years as low interest rates led more homeowners to seek refinancing, according to data from an industry group on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity rose 7.5 percent to 1,054.9 in the week ended January 25. It was last higher in late March 2004, the MBA said.

The MBA seasonally adjusted index of refinancing applications soared 22.1 percent to 5,103.6, the highest since July 2003. But the index measuring applications for home purchases declined 17.7 percent to 362.0, the MBA said.

Refinancing activity rose to 73 percent of all applications, up from 66 percent in the previous week, the MBA said. The jump came after the Federal Reserve lowered its target short-term interest rate in an emergency move aimed at stemming economic weakness and easing tight credit conditions.

Fixed 30-year mortgage rates rose 0.11 percentage point last week to 5.6 percent, the MBA said. The previous week's rate was the lowest since late June 2005.

The Fed is expected to lower its overnight federal funds target again on Wednesday as it concludes a policy meeting. But lowering the short-term rate may not mean further declines in fixed-mortgage rates, which more closely follow yields on the Treasury 10-year note.

Chance of recession at least 50 percent: Greenspan

BERLIN (Reuters) - The likelihood of the economy slipping into recession is at least 50 percent, former Federal Reserve Chairman Alan Greenspan was quoted on Wednesday as saying.

"I believe the probability of a recession is at least 50 percent, but up to now there are few signs that we are already in one," Greenspan said in an interview with weekly newspaper Die Zeit published in German. "In my opinion, it will probably happen but the facts suggest we are not there yet."

Asked whether central bankers and financial policymakers could head off a U.S. recession, Greenspan said: "Probably not. Global economic influences today are stronger than almost anything that monetary or fiscal policy can counter them with."

"Long-term real interest rates have significantly more influence on the core of the economy than decisions by national governments," he added. "And central banks have increasingly lost the ability to influence these long-term rates, whereas 20 or 30 years ago they still dominated there.

"So the more important question today is in which direction long-term real interest rates are heading."

The Fed is expected to cut interest rates again on Wednesday as part of its effort to offset the effects of a deep housing slump and credit crunch. This cut would follow a 75 basis point reduction last week to 3.5 percent and mark one of the deepest and fastest rate-cutting episodes since the early 1980s.

The U.S. economy grew at a 4.9 percent annual rate in the third quarter of 2007, but gloomy economic data this month -- notably a report of weak hiring in December -- suggests growth has slowed abruptly.

Crisis inflicts fresh wounds, UBS cut deepest

LONDON (Reuters) - Fresh writeoffs at big European and Japanese banks on Wednesday threw the investor spotlight firmly back onto the credit crunch after days gazing at Societe Generale's stunning losses, which it blames on a junior trader.

With the Federal Reserve expected to cut interest rates for the second week running, Swiss bank UBS (UBSN.VX) illuminated the depth of the crisis -- unveiling $4 billion in new writedowns tied to the U.S. subprime mortgage meltdown, dragging it deep into the red for the year.

UBS has now written off a total of $18.4 billion on the back of a credit crisis that has caused over $100 billion in losses worldwide and forced UBS and others, such as Citigroup (C.N) and Merrill Lynch (MER.N), to seek emergency capital from abroad.

The Swiss bank posted a 12.5 billion Swiss franc ($11.45 billion) loss for the last three months of 2007 and a full-year loss of 4.4 billion francs.

Newspaper reports said subprime losses at Japan's Mizuho Financial Group Inc (8411.T) may have ballooned to as much as $2.8 billion, potentially forcing the bank to cut its full-year forecast for a second time.

Japan's 2nd-largest bank, which reports results on Thursday, may have to inject 200 billion yen ($1.9 billion) or more into its faltering brokerage unit, the Nikkei business daily said.

"2007 (was) a horrible year for the banks and the sector is not out of the woods yet," said Franz Wenzel, strategist at AXA Investment Managers in Paris. "Most of the banks will try to put all the write-downs in their 2007 results as they want to clean the balance sheet going forward."

Munich Re (MUVGn.DE), the world's second-biggest reinsurer, bucked the trend, posting record earnings for 2007 and booking fourth quarter losses of less then 10 million euros on investments exposed to the subprime market.

BNP Paribas (BNPP.PA), France's biggest listed bank, said it expected fourth quarter net profit would fall 41.8 percent to 1 billion euros ($1.48 billion), as rumors swirled that it may pounce on weakened rival Societe Generale (SOGN.PA).

On August 9 last year, Paribas helped spark round one of the credit crisis by freezing three of its investment funds as defaults mounted on subprime mortgages, lent to Americans ill-equipped to repay them.

Interbank lending virtually dried up as banks realized they did not know which among them were dangerously exposed to the U.S. subprime sector, forcing central banks to pour funds into money markets to keep them oiled, something they are still doing.

CUT AND CUT AGAIN

Later on Wednesday, the Fed is expected to follow up last week's surprise 75 basis point interest rate cut with a further half point reduction.

Financial markets see a three-in-four chance the Fed will lower benchmark overnight rates by a half-percentage point as it seeks to counter the risk of a U.S. recession.

But with credit jitters compounded by SocGen's losses of more than $7 billion, which it said last week it had uncovered through massive unauthorized stock trading by one of its employees, markets looked unlikely to be impressed.

"This is not going to fundamentally change the view of the U.S. economy. Subsequent macroeconomic data will have to show the economic stimulus measures are indeed making an impact," said Sung Jin-kyung, an analyst at Daishin Securities in Seoul.

The shadow of an FBI investigation spread across the subprime crisis on Tuesday.

The FBI said it was investigating 14 corporations over possible accounting fraud and insider trading violations in a crackdown on subprime lending. The companies were not named.

The FBI said it was cooperating with the Securities and Exchange Commission. Goldman Sachs (GS.N), Morgan Stanley (MS.N) and Bear Stearns (BSC.N) each said government investigators were seeking information from them about their subprime activities.

The U.S. House of Representatives overwhelmingly passed a $146 billion economic stimulus package on Tuesday. Parts of the package would allow the Federal Housing Administration and housing finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) to help prop up the mortgage market.